Establishment modes and network relationships of foreign subsidiaries

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Establishment modes and network relationships of foreign subsidiaries Alfredo Valentinoa, Matteo Carolia, Ulrike Mayrhoferb, a b

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Università Luiss Guido Carli, Department of Business and Management, viale Romania 32, 00197 Roma, Italy Université Côte d’Azur, IAE Nice, GRM, France

A R T I C LE I N FO

A B S T R A C T

Keywords: Multinational companies Foreign subsidiaries Liability of foreignness Liability of outsidership Establishment mode Social networks Business networks External embeddedness

This research examines the effects of the establishment mode of foreign subsidiaries (greenfield vs acquisition) on the type of network relationships (social vs business) they develop in local markets. The authors use the network approach to better understand the role played by local subsidiaries for the development of networks in multinational enterprises. The empirical study is based on a dataset covering 120 foreign-owned subsidiaries in Italy. The findings show that acquired subsidiaries are more directly involved in business relationships, whereas greenfield subsidiaries pay more attention to social relationships before building business networks. The establishment mode thus affects the type of network relationships developed by local subsidiaries, which can help them to overcome the liabilities of foreignness and outsidership.

1. Introduction Multinational enterprises (MNEs) play a predominant role in the process of globalization and contribute significantly to the creation of wealth in national economies. According to data provided by UNCTAD (2016, 2017), the flows of foreign direct investment (FDI) grew by 38% between 2014 and 2015, to $1.76 trillion, the highest level since the beginning of the global economic and financial crisis. In 2016, FDI flows decreased by 2% to $1.75 trillion and are forecast to increase by 5% to almost $1.8 trillion in 2017. The statistics provided show that an increasing number of FDI take the form of cross-border mergers and acquisitions (M&As) (who achieved a total value of $721 billion in 2015 and $869 billion in 2016), even if the announced greenfield investments also remain at high levels ($766 billion in 2015 and $828 billion in 2016). Inward FDI flows to developed economies almost doubled to $962 billion between 2014 and 2015, and rose by 5% to $1 trillion in 2016, and this growth mainly concerns European countries. “MNEs are companies who engage in foreign direct investments (FDI) and who own or, to a certain extent, control value-added activities in several countries” (Dunning & Lundan, 2008: p. 3). These activities generally take place within subsidiaries. Multinational enterprises play an increasing role in host country environments, since foreign subsidiaries are embedded in local networks and interact with a variety of actors (suppliers, distributors, customers, public authorities, etc.) (Ciabuschi, Holm, & Martín Martín, 2014; Forsgren, 2008; Hennart, 2009). Foreign subsidiaries differ considering the extent to which they are able to build strong and interdependent relationships with such local stakeholders

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(Halaszovich & Lundan, 2016; Hsu, Chen, & Caskey, 2017). Extant literature has shown how such local embeddedness positively impacts the stock of knowledge (Almeida & Phene, 2004; Hakanson & Nobel, 2001; Mu, Gnyawali, & Hartfield, 2007) and performance (Andersson, Forsgren, & Holm, 2002; Oehmichen & Puck, 2016) of foreign subsidiaries, helping them to contribute and improve the competitive advantage of the multinational enterprise (Nell, Andersson, & Schlegelmilch, 2010). Being embedded with local actors and learning from them is strategically important for foreign subsidiaries because they can access valuable resources and knowledge to build a competitive advantage for themselves and for the multinational enterprise (Doz, Santos, & Williamson, 2011; Mayrhofer, 2013). For instance, Frost (2001, p. 101) indicates that “a potentially important source of competitive advantage for multinational firms is the capacity of their foreign subsidiaries to generate innovations based on stimuli and resources resident in the heterogeneous host country environments in which they operate”. Previous research has explained how internal (e.g. Andersson, Bjorkman, & Forsgren, 2005; Hakanson & Nobel, 2001) and environmental factors (Giroud & Scott-Kennel, 2009; Nell et al., 2010; ScottKennel, 2007) are associated with such embeddedness. Despite the growing importance of local embeddedness for building competitive advantage, little is still known about this topic. The concepts of “liability of foreignness” (Zaheer, 1995) and “liability of outsidership” (Vahlne & Johanson, 2013) contribute to a better understanding of the situation faced by foreign subsidiaries. Holding an outsider position complicates the process of being embedded in host country networks. The local embeddedness of foreign subsidiaries raises important

Corresponding author. E-mail addresses: [email protected] (A. Valentino), [email protected] (M. Caroli), [email protected] (U. Mayrhofer).

https://doi.org/10.1016/j.ibusrev.2018.05.006 Received 17 July 2017; Received in revised form 14 February 2018; Accepted 17 May 2018 0969-5931/ © 2018 Published by Elsevier Ltd.

Please cite this article as: VALENTINO, A., International Business Review (2018), https://doi.org/10.1016/j.ibusrev.2018.05.006

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psychic distance is important (Johanson & Vahlne, 2009). The Uppsala process model of internationalization revisited by Johanson and Vahlne (2009, 2011) and Vahlne and Johanson (2013) highlights the growing importance of business networks for the international expansion of companies. Johanson and Vahlne (2009, 2011) consider markets as networks of relationships in which firms are linked to each other in various patterns. The authors argue that the “insidership” in business networks is necessary for successful internationalization. The possibility of acquiring stable positions in such networks depends on psychic distance, learning capacities and experience. Johanson and Vahlne (2009) show that network relationships allow identifying and exploiting new market opportunities. Moreover, relationships offer potential for trust-building and commitment, two important aspects for expanding into foreign markets. In line with the original version of the Uppsala model (Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975), the revised model integrates two types of variables: state variables (knowledge, opportunities, network position) and change variables (relationship commitment decisions, learning, creating, trust-building). It suggests that knowledge and opportunities influence relationship commitment decisions. In the same way, learning, creating and trust-building have an impact on business network positions. For firms expanding abroad, networks are an essential way of gaining knowledge about foreign markets and accessing new resources. Johanson and Mattsson (1987, 2002); Johanson and Mattsson, 1987 emphasize that internationalization performance depends on a firm’s ability to build relationships and position itself vis-à-vis various actors abroad (suppliers, customers, public authorities, etc.). Networks are a major source of information, enabling firms to identify and seize new opportunities and to develop lasting trust-based relationships with foreign partners (Johanson & Vahlne, 2009). Consequently, belonging to a network means interacting and sharing resources in a long-term perspective. It is necessary to develop trust-based relationships between network members who must display a clear will to become involved in joint activities. The revised Uppsala model highlights that the success of firms on international markets largely depends on their ability to embed themselves in key networks, to identify their most influential members and to interact with the other members (Johanson & Vahlne, 2009). According to business network theory, a multinational enterprise consists of several business units, the subsidiaries, even if the firm is one legal and administrative entity. Each subsidiary is embedded in a specific network of business relationships, which can be different from the networks of other subsidiaries. An MNE can be considered as a geographical configuration of assets owned by the firm and a configuration of business networks. The business network theory focuses on the environment of each subsidiary by analysing the business relationships surrounding the subsidiary. Through their subsidiaries, MNEs are thus embedded in multiple business networks (Forsgren, 2008). MNEs are shaped as a “multiple network”: one network is formed by the headquarters and the subsidiaries operating in different countries; hence, it can be defined as the “internal network” (see Fig. 1). Each of these subsidiaries develops its own relationships with suppliers, distributors, other companies, institutions, different stakeholders in the territory(ies) where it operates; therefore, it develops an “external network”. The outcomes generated by the relationships the subsidiary develops in its “external network” can affect the ones it has in the “internal networks”; hence its role and relevance within it. Local business embeddedness is seen as a key factor for the success of international operations, since it is often via relationships that companies learn, and build trust and commitment. Insidership in local networks is thus a necessary condition for the development of foreign subsidiaries. It seems important to note that foreignness often complicates the process of becoming an insider, which can be facilitated in the case of acquisitions (Johanson & Vahlne, 2009). The established relationships with local actors can provide access to resources, knowledge

questions for both academic research and corporate practices. This research attempts to contribute to this debate. Using a network approach (Forsgren, 2008; Johanson & Vahlne, 2009; Vahlne & Johanson, 2013), the aim of this paper is to determine the way the establishment mode of a subsidiary (greenfield vs acquisition) influences the type of network relationships (social and/or business) developed in local markets to overcome the liabilities of foreignness and outsidership. For the empirical investigation, we use a dataset covering 120 foreign-owned subsidiaries in Italy. Following Andersson et al. (2005) and Dellestrand and Kappen (2012), data were collected through structured interviews with top and senior managers of these subsidiaries. Our findings indicate that the type of relationships developed by foreign subsidiaries is linked to the establishment mode. Acquired subsidiaries are more directly involved in business relationships than greenfield subsidiaries. They already benefit from a relevant position in local business networks and thus increase their commitment in those well-known networks to strengthen their position within the company who bought them and to maintain a high level of autonomy. Conversely, greenfield subsidiaries pay more attention to social relationships with local stakeholders before then building business relationships. They generally suffer from liabilities of foreignness and outsidership in their host country. To overcome this situation and to become accepted insiders, they need to develop social relationships with local key players before they can establish business relationships. In the next section of the paper, we will explain the theoretical framework which focuses on network relationships and the establishment mode of foreign subsidiaries. The following sections are dedicated to the presentation of the methodology, and the analysis and the discussion of the findings of the empirical study conducted for this research. 2. Foreign subsidiaries and network relationships In this section, we will first highlight the importance of network relationships for the internationalization process of MNEs. We will then explain different types of networks and how they may be related to the establishment mode of foreign subsidiaries. 2.1. Can network relationships of foreign subsidiaries help to overcome liabilities of foreignness and outsidership in host countries? Research in international business has demonstrated that MNEs developing business abroad have to deal with additional costs that are often linked to their unfamiliarity of the local environment, cultural, economic and institutional differences between their home and host countries and the need for coordinating geographically dispersed activities. This liability of foreignness can represent a major barrier to the development of foreign subsidiaries since they need to compete with local firms in their host country environment. As mentioned by Zaheer (1995: p. 343), “whatever its source, the liability of foreignness implies that foreign firms will have lower profitability than local firms, all else being equal, and perhaps even a lower probability of survival”. In the same way, Wu and Salomon (2016, 2017) point out that foreign firms often need more time to set up their subsidiaries, face higher operating costs, achieve lower levels of profitability and have higher failure rates than their domestic counterparts. To overcome this liability of foreignness, MNEs can provide their subsidiaries with firm-specific advantages, for example in the form of branding, technologies and factor-cost advantages or organizational and managerial capabilities (Zaheer, 1995). It is then necessary that foreign subsidiaries get access to local business networks (suppliers, distributors, customers, etc.) to set up operations and to develop in their local markets. The establishment of networks can thus be considered as a sine qua non condition to deal with the liability of foreignness in host country environments. The process of building new business relationships in local markets takes time and appears to be more difficult when 2

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Fig. 1. MNEs multiple networks.

developed by the target company (Lee & Lieberman, 2010). We can thus assume that the type of relationships (social vs business) established by local subsidiaries is linked to their establishment mode. The liability of outsidership (Johanson & Vahlne, 2009) may be more easily overcome through the acquisition of local companies, since acquisitions facilitate the access to local networks. These subsidiaries are “insiders” legitimized in the host country with a strong position in local business networks (Anderson, Suthreland, & Severe, 2015; Jory & Ngo, 2014). Acquired companies are insiders in host country networks, but outsiders in the MNE’s internal network. They struggle to maintain their autonomous position and therefore attempt to draw power from their local business networks. They seek stability and trust in their relationships, which is more likely to occur in existing, mutually adapted partnerships than in new relationships (Gulati, 1995). Acquired subsidiaries prefer to maintain their partners and to increase their commitment (Nell et al., 2010). Developing their embeddedness in local business networks (or calculative networks), these subsidiaries are able to improve their stock of knowledge, and, therefore, their performance and their relevance within the MNE. Consequently, they allow reinforcing relationships with business partners (suppliers, distributors, customers etc.) and institutional authorities (Brockman, Rui, & Zou, 2013; Trichterborn, Zu Knyphausen-Aufseß, & Schweizer, 2016) more easily than greenfield investments. We can thus hypothesize that subsidiaries established by acquisitions increase the development of business relationships more than greenfield subsidiaries.

and information. They can offer new business opportunities and stimulate interactive learning processes, the development of new competencies and thus innovation (Oehmichen & Puck, 2016). For the MNE, the development of such relationships can help to improve their international competitiveness and to capitalize on locational advantages (Gammelgaard, McDonald, Stephan, Tüselmann, & Dörrenbacher, 2012). 2.2. Establishment modes of foreign subsidiaries and types of local networks A network can be defined as a set of relationships built by and between individuals and/or organizations. Its main purpose is to connect actors who are pursuing similar objectives and wish to collaborate, more or less formally, to increase mutual benefits. Huggins (2010) differentiates two types of networks: “social” networks and “calculative” networks. Social networks are based on a logic relating to sociability and socialization. They function on the basis of trust, mutual obligations, and the satisfaction of their members’ social expectations. They are centred on interpersonal relationships and appear to be stable, but generate more social than economic value. “Calculative” networks are based on a logic relating to economic expectations. They are governed by the satisfaction of their members’ economic expectations and centred on inter-organizational relationships. They are more unstable, but give their members access to the knowledge they require to make their business activities more profitable. Gulati (2007) introduces the concept of “network resources” to understand the advantages provided by networks in allowing firms to leverage valuable information and resources possessed by their network partners. The concept allows describing and understanding the resources (or capital) generated by networks. The author considers that both interpersonal and inter-firm relationships represent important network resources. In fact, firms can be interconnected with other organizations through a wide range of social and economic relationships. Lavie (2006) proposes an extension of the resource-based view (RBV) to account for external network capabilities in addition to internal capabilities. External network capabilities of MNEs are often managed through foreign subsidiaries, who can take the form of greenfield subsidiaries (created from scratch) or acquisitions (where the company owns the majority of the capital of a local firm). In the case of greenfield subsidiaries, the MNE needs to build networks in the host country, whereas acquisitions allow to have access to the networks

Hypothesis 1. Foreign subsidiaries established through acquisitions are more directly involved in business networks than greenfield subsidiaries. An MNE who decides to enter foreign markets where it has no relevant network position suffers from both the liability of foreignness (Wu & Salomon, 2016, 2017; Zaheer, 1995) and the liability of outsidership (Johanson & Vahlne, 2009, 2011). Foreignness can complicate the process of becoming an insider in host country networks and to establish business relationships, more specifically when the established subsidiaries are greenfield investments. Moreover, foreignness exacerbates the struggle of greenfield subsidiaries to gain legitimacy in host countries. Local partners and stakeholders perceive them as outsiders with their own interests. Outsidership, foreignness, and legitimacy are the main issues a greenfield subsidiary has to solve to be perceived as an insider from the host country (Johanson & Vahlne, 2009). In this 3

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case, the greenfield subsidiary must first attain legitimacy from local partners and acquire knowledge about the important members of the business network and how they are related to each other (Forsgren, 2008; Johanson and Mattsson, 1987; Johanson & Mattsson, 1987, 2002). It needs to implement strategic actions to change its status from an outsider to an insider in the host country. To overcome their liabilities of foreignness and outsidership, greenfield subsidiaries often focus their attention on social networks, establishing social relationships with the main host country players, and actively contribute to solve local issues. We can therefore hypothesize that foreign subsidiaries established through greenfield investments need to build more social relationships in the host country than acquired ones.

main goals and managerial implications. The interviews lasted around 60 min. The data collection period was from April 2016 to March 2017. The interviews were structured and based on a pre-tested questionnaire that the respondent and the researcher filled out during the discussion. The questionnaire was first developed in English and then translated into Italian. The questionnaire validation process was strengthened by the critical analysis from other researchers and, following their feedback, we modified questions that were too ambiguous, vague, and unclear. Subsequently, we tried to minimize consistency artifacts reducing the length of questions and keeping the questionnaire relatively short (three pages including the general information on the firm and the respondent). Then, we pre-tested the questionnaire in two pilot interviews with the aim to better specify the questions using a practitioner language as well as to exclude erroneous indicators. We positioned dependent and independent variables at different places in the questionnaire (Ambos, Andersson, & Birkinshaw, 2010), reducing the risk that respondents can cognitively imagine and create the correlation between related items and/or constructs needed to produce a common method variance-biased pattern of responses (Murray, Kotabe, & Zhou, 2005; Podsakoff, MacKenzie, Lee, & Podsakoff, 2003). Moreover, we used different scale endpoints and anchors to limit potential common method variance caused by commonalities in scale endpoints and anchor effects (Chang, van Witteloostuijn, & Eden, 2010; Podsakoff et al., 2003). As mentioned before, our data are based on managers’ perceptions. To reduce the risk of social desirability bias, we asked the respondents to answer our questions in an indirect way, putting themselves in the perspective of a group of managers rather than their own point of view. To improve the response rate, we ensured the confidentiality of the firm and the interviewee, we did two follow-up rounds and promised to provide the main results of the study (Dillman, 2000). We interviewed only one respondent in each subsidiary due to limitations in time and resources, but we chose top and senior managers in the best position to provide data and information on all questions needed for this research. Moreover, conducting the interviews face-toface through a pre-tested questionnaire, we tackled the risk of the potential common method bias. In this way, the interviewer always checked the validity of the respondent’s answer, asking the respondent to comment his or her answer if “un-coherent” high or low scores have been suggested (Andersson et al., 2005). Thus, the used methodology helps to target the appropriate respondent and detect inconsistencies in answers during the interview, improving the validity and the reliability of the data. Additional data on firm characteristics as well as on the industry and country were collected through the companies’ annual reports, and secondary dataset, e.g. Orbis and Zephyr. The final sample counts 120 observations (response rate: 12,24%). We controlled for a potential sample selection bias by testing an ANOVA between the first respondents and the last ones after follow-up mailing. The results did not show any differences between early and late respondents. Our sample only includes subsidiaries whose capital is entirely held by foreign companies. On average, they have 321 employees and generate 130 million USD of annual revenues. A breakdown by industry indicates that 48% of subsidiaries operate in manufacturing industries, roughly one third (34%) in the service sector, 10% in the wholesale trade sector and 8% in transportation activities. Concerning the parent nationality, we can note that European multinationals are the largest part of the sample (64%), followed by American (29%), including North (both USA and Canada) and South America, and Asian-Pacific (7%) (Japan, China, and India) companies. More specifically, 26% of parent firms come from the USA, 13% from Germany, and 12% from the United Kingdom. The others with a percentage ranging between 8% and 4% come from France, Switzerland, Belgium, Finland, Denmark, Sweden, Spain, Poland, Netherlands, China, Japan, India, Canada and Argentina.

Hypothesis 2. Foreign subsidiaries established through greenfield investments are more directly involved in social networks than acquired subsidiaries. Social networks are structures that facilitate interactions and relations with other individuals and organizations (Granovetter, 1985). As expressed by Huggins (2010), they are based on sociability and socialization, and usually take time to establish. The development of such networks can provide access to business opportunities, since formal and informal meetings with local actors are occasions to interact and to exchange information (Mendez, 2003). The process also helps to strengthen trust between members of established networks (Granovetter, 1985; McAllister, 1995). Interacting in social networks can help subsidiary managers to build trust with local actors and to satisfy their social expectations. Social relationships are relatively stable and can help to create business relationships. To overcome the liabilities of foreignness and outsidership, subsidiaries must become legitimate “insiders” in their host country (Johanson & Vahlne, 2009). By implementing actions to create social value for their local environment, they are more likely to achieve the acceptance from the host community and the “insider” status. When subsidiaries are able to build strong social ties with local actors, they can more easily develop relationships based on mutual trust and help. Repeated interactions with local stakeholders can provide access to strategic information (Levin & Cross, 2004) and favour local business embeddedness. In view of this, greenfield subsidiaries with local social commitment will develop business networks in their host country (indirect effect), hence the following hypothesis: Hypothesis 3. Foreign subsidiaries established through greenfield investments will create business networks through their involvement in social networks. Our theoretical framework is summarized in Fig. 2. 3. Methodology 3.1. Sample and data collection Foreign-owned subsidiaries in Italy are the sampling frame of this study. They were identified through the Bureau van Dijk Orbis database. After an exhaustive review of the shareholder and ownership structures, the pool of potential observations for this study was of 980 firms. Following Andersson et al. (2005) and Dellestrand and Kappen (2012), data were collected through structured face-to-face (or phone) interviews with top and senior managers of Italian foreign-owned subsidiaries. So, the bulk of our data are based on the perceptions of top and senior managers at the subsidiary level. In this way, we collected data on the cognitive dimensions of headquarters-subsidiary relationships, which play an important role for managers when they take strategic decisions. Managers often act following their perceptions and feelings (Boyd, Dess, & Rasheed, 1993; Weick & Roberts, 1993). To start the data collection process, we first sent an invitation letter via the corporate e-mail address to the identified top or senior manager of the Italian subsidiary, where we described the project underlining its 4

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Fig. 2. Theoretical framework.

subsidiary’s specific business activity and captures to what extent local issues are important for the subsidiary. So, we intend to find out how the subsidiary is involved socially in the host country creating social relationships and value for it, and contributing to solve local issues. Following Husted and Allen (2006), we measure this variable asking four questions to the subsidiary managers. We asked them to what extent the subsidiary is involved in the host country by (1) creating new jobs, (2) collaborating with the local community, (3) supporting local issues, and (4) respecting the local environment. A 5-point Likert-type scale from 1 (not at all) to 5 (very much) was used to measure this indicator. The answers were averaged to produce a single construct with a Cronbach α = 0.74 that indicates a good overall reliability. Then, a factor analysis with a varimax rotation and Kaiser normalization was conducted. The Kaiser-Mayer-Olkin (KMO) measure of sampling adequacy was 0.66, that is higher than the threshold value of 0.6 (Tabachnick & Fidell, 2001). The Bartlett test of sphericity returned at a 0.00 significant level, showing a sufficient correlation between the items. The eigenvalue for extracting only one factor was 1.62, while for the second factor it was equal to 0.09 indicating that only one factor should be extracted by the selected items for the “local social embeddedness” variable. Moreover, the average variance extracted (AVE) was 0.85, exceeding the recommended value of 0.50. The composite reliability (CR) was 0.96 and thus higher than the critical value 0.70.

3.2. Presentation of main variables Our research model includes three main variables: “establishment mode”, “local business embeddedness” and “local social commitment”. The variable “establishment mode” in the host country measures the nature of the subsidiary in terms of being an acquisition or a greenfield investment. Like in previous studies, it is a dichotomous variable that takes value 1 for a greenfield investment, and value 0 for an acquisition. The variable “local business embeddedness” captures the frequency of interaction between two entities in a relationship and the mutual adaptation concerning products, resources and/or activities. Specifically, this variable considers a subsidiary’s specific business activity in the host country and captures how the subsidiary’s relationships with local actors influence its ordinary business activities, departing from arm’s length relationships (Uzzi, 1997). So, with this variable, we attempt to identify how the subsidiary is embedded in local relationships, considering to what extent it has adapted its business behavior and practices to its external business partners. Following Andersson et al. (2002) and Andersson et al. (2005), we measure this variable asking four questions to the subsidiary managers. We asked them to estimate to what extent the subsidiary has adapted, due to relationships with local customers, suppliers and other stakeholders, its (1) product technology, (2) production technology, (3) standard operating procedures, and (4) business practices. A 7-point Likert-type scale from 1 (not at all) to 7 (very much) was used for this indicator. The answers were averaged to produce a single construct with a Cronbach α = 0.74 that indicates a good overall reliability exceeding the 0.70 threshold. Then, a factor analysis with a varimax rotation and Kaiser normalization was conducted. The analysis showed appropriate results. The Kaiser-Mayer-Olkin (KMO) measure of sampling adequacy was 0.73, higher than the acceptable value of 0.6 (Tabachnick & Fidell, 2001). The Bartlett test of sphericity presented a p-value equal to 0.00, indicating a sufficient correlation between the items. The eigenvalue for extracting only one factor was 1.59, while for the second factor it was equal to 0.0002. This indicates that only one factor should be extracted by the selected items for the “local business embeddedness” variable. Moreover, the average variance extracted (AVE) was 0.85, exceeding the recommended value of 0.50. The composite reliability (CR) was 0.96 and thus higher than the critical value 0.70. The variable “local social commitment” captures how much the foreign subsidiary is involved in the local context and takes care of the host community and environment. This variable does not refer to the

3.3. Control variables In order to control for other effects than hypothesized, we used several control variables drawn from existing literature. We controlled for subsidiary autonomy that measures the degree of autonomy the subsidiary has within the multinational enterprise in taking decisions without headquarters’ involvement. Following Ambos et al. (2010), we measure this variable through three questions. We asked subsidiary managers how much autonomy their subsidiary has in making decisions about new market entries, domestic markets, investments in major plants or equipment to expand manufacturing capacity. Respondents answered on a 5-points Likert scale ranging from 1 (“the subsidiary’s opinion is not asked; decision is explained to subsidiary by corporate headquarters”) to 5 (“Decision made by the subsidiary without much consultation with headquarters”). The answers were averaged to produce a single construct with a Cronbach α = 0.74 that indicates a good overall reliability. A varimax factor analysis showed that the four items loaded on one factor. The Kaiser-Mayer-Olkin (KMO) measure of 5

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Table 1 Means, standard deviations, and correlation matrix.

1. Local business embeddedness 2. Establishment mode 3. Local social commitment 4. Subsidiary autonomy 5. Headquarters’ monitoring 6. Geographical distance 7. Economic distance 8. Administrative distance 9. Cultural distance 10. Subsidiary age 11. Subsidiary size 12. Industry

Mean

S.D.

1

2

3

4

5

6

7

8

9

10

11

12

3.25 0.51 3.38 3.05 1.52 3453 2.18 14.24 7.75 15.88 5.30 1.75

1.21 0.50 0.90 0.89 0.83 3028 1.88 15.35 3.87 11.13 3.86 0.88

1 −0.21** 0.15 0.24** 0.12 0.10 −0.02 −0.07 −0.00 −0.04 −0.03 0.04

1 0.39*** −0.11 −0.15* −0.06 0.06 0.12 −0.19** 0.17* −0.07 0.11

1 0.22** −0.11 −0.00 0.09 0.06 −0.02 −0.01 0.16* 0.12

1 −0.05 −0.02 0.01 −0.02 −0.04 −0.06 −0.08 −0.02

1 0.08 0.16* −0.08 0.14 0.00 0.06 −0.04

1 0.36*** 0.01 0.25*** 0.12 0.14 0.06

1 −0.05 0.25*** 0.00 −0.01 0.01

1 −0.21** −0.01 0.19** 0.03

1 0.08 −0.21** −0.05

1 0.05 −0.05

1 0.27***

1

Notes: *,** and *** denote significance at the 10%, 5% and 1% level.

violated normal distribution. Following Hayes (2013) and Preacher, Rucker, and Hayes (2007), bootstrapping is considered as the most reliable approach to test the mediation effect. We used the mediation analysis software “Process” provided by Hayes (2013). Table 1 shows the descriptive statistics and correlation matrix of variables involved in this study. We can see a low correlation among variables, indicating that the dataset does not seem to suffer from multicollinearity issues. The highest pair-wise correlation is between establishment mode and local social commitment, but it is below the threshold value of 0.5. The final results of regressions in the mediation analysis are reported in Table 2. The results of the tests for direct and indirect effects of establishment modes on local business embeddedness in the mediation analyses are shown in Table 3. In Table 2, we distinguish alternative specifications in our two main models:

sampling adequacy was 0.68, and the Bartlett test of sphericity returned at a 0.00 significant level. Moreover, the average variance extracted (AVE) was 0.81, and the composite reliability (CR) 0.96. Furthermore, we controlled for headquarters’ monitoring that captures the control of corporate headquarters over subsidiary’s activities. To measure this variable, we followed O’Donnell (2000) and Andersson et al. (2005), focusing on one dimension of direct control. So, we asked the number of expatriates in the subsidiary’s top management team. Another control variable is the distance from corporate headquarters. This variable is a multi-dimensional construct covering various aspects. Building on a previous study (Berry, Guillén, & Zhou, 2010), we focused on four variables: geographical, economic, administrative and cultural distance. We compute the geographical distance in kilometers between the capital of the subsidiary’s country and the capital of the corporate headquarters’ country. We used the distance calculator, one of the applications in Google Maps. Economic distance is measured by computing differences in terms of income per capita, inflation, exports, and imports between the home country of corporate headquarters and the host country of the local subsidiary. We used the World Development Indicators (WDI). Administrative distance is defined as differences in bureaucracy, language, religion and legal systems between corporate headquarters and subsidiary countries and it is quite stable during time (Berry et al., 2010). To measure such distance, we used the CIA Factbook and the World Development Indicators (WDI). Cultural distance concerns “differences toward authority, trust, individuality, and importance of work and family” (Berry et al., 2010: p. 1464). Following Berry et al. (2010), we measured cultural distance through public opinion data from four waves of the World Values Survey (WVS). Since this distance varies over time (Inglehart & Baker, 2000), the frequency of WVS (every 5 years) allowed us to capture these changes. We also controlled for the size of the subsidiary measured as the log of the revenues realized at the year of observation. We controlled for the age of the subsidiary. We measured this variable as the difference between the year of the first establishment and the year of observation. Finally, we controlled for the industry where the subsidiary operates. It is a categorical variable that takes values from 1 to 4 based on 4digit SIC code (respectively, Manufacturing, Services, Wholesale trade, and Transportation). These data were collected from the Orbis database.

1. Specification 1 contains all control variables 2. Specification 2 contains the full model with controls In the discussion section, we will focus our attention on specification 2 that contains the full model with all variables. We will first present the results in relation to our theoretical model and hypotheses. Hypothesis 1 posits that foreign subsidiaries established through acquisitions are more directly involved in business networks than greenfield subsidiaries. As we can see from Tables 2 and 3, the corresponding coefficient is negative and significant, thus supporting this hypothesis at the 5% confidence level. Therefore, Hypothesis 1 is confirmed. In Hypothesis 2, we predicted that foreign subsidiaries established through greenfield investments would be more directly involved in social networks in their host country than acquired subsidiaries. As shown in Table 1, the corresponding coefficient is positive and significant at the 1% confidence level. Thus, we can conclude that Hypothesis 2 is also confirmed. In Hypothesis 3, we predicted that foreign subsidiaries established through greenfield investments would create business networks through their involvement in social networks, since they had no direct access to business relationships in their host country. They use their local social commitment to become more involved in business networks. As indicated by Tables 2 and 3, the value of the indirect effect is positive and statistically significant. To confirm the mediation effect of local social commitment on the main relation between establishment mode and local business embeddedness, we carried out the Sobel test, which was significant at p = 0.0373. Hence, we can affirm that Hypothesis 3 is supported. An examination of our control variables reveals the following picture. The coefficients of all controls remain statistically insignificant in almost all models. The two exceptions are for subsidiary autonomy and

4. Results To test our hypotheses, we run a mediation regression analysis employing the bootstrapping approach. Bootstrapping is a non-parametric resample method through which we resample the data 5000 times. It allows to estimate direct and indirect effects but also the standard errors and confidence intervals unbiased even if the error term 6

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Table 2 Results of mediation regression analysis for hypothesis test.a,b,c Local social commitment

Local business embeddedness

1 Establishment mode Local social commitment Subsidiary autonomy Headquarters’ monitoring Geographical distance Economic distance Administrative distance Cultural distance Subsidiary Age Subsidiary size Cons N R2

2

1

2

0.325*** (0.122) 0.190 (0.134) 0.00 (0.00) −0.061 (0.063) −0.006 (0.007) −0.008 (0.031) −0.005 (0.009) 0.010 (0.029) 2.085*** (0.578) 120 0.10

−0.637** (0.250) 0.323** (0.138) 0.207* (0.126) 0.177 (0.133) 0.00 (0.000) −0.053 (0.063) −0.005 (0.007) −0.027 (0.031) 0.00 (0.009) −0.003 (0.029) 1.803*** (0.644) 120 0.16

0.778*** (0.156) 0.232** (0.090) −0.137 (0.099) −0.00 (0.000) 0.062 (0.047) 0.002 (0.005) 0.010 (0.023) −0.00 (0.007) 0.048** (0.022) 2.463*** (0.427) 120 0.11

0.284*** (0.083) −0.068 (0.091) 0.00 (0.00) 0.027 (0.043) 0.00 (0.005) 0.029 (0.021) −0.006 (0.006) 0.045** (0.020) 1.835*** (0.407) 120 0.28

Coefficients obtained from the regressions are the basis for calculating the direct and indirect effects of “establishment mode” on “local business embeddedness” as explained by Hayes (2013). b *,** and *** denote significance at the 10%, 5%, and 1% levels, respectively. Standard Error (SE) is in the parentheses below the coefficients. c All regressions include industry dummies, though the coefficients of these dummy variables are not reported in the table due to space constraints. a

adaptation concerning products, resources and/or activities than greenfield investments. They wish to maintain their local autonomy and their relevant position within the MNE and therefore prefer to reinforce known and secure business relationships. Conversely, greenfield subsidiaries will first establish more social relationships in the host country than acquired ones before then developing business networks. To overcome their foreignness and outsider status, they need to be accepted by local communities in order to strengthen and establish effectively business relationships. This study contributes to the debate about local embeddedness and the role of foreign subsidiaries in several ways. First, our empirical study shows the relevance of the revised Uppsala model of internationalization (Johanson & Vahlne, 2009, 2011; Vahlne & Johanson, 2013), which highlights the importance of business networks and the role of “insidership” in such networks for successful international expansion. Second, we provide insights about different types of local relationships to overcome the liabilities of “foreignness” and “outsidership”. Following previous studies on local embeddedness, we explain the type of networks developed by foreign subsidiaries as a consequence of the establishment mode. Third, we relate the local embeddedness to the internal network of MNEs. More specifically, we describe a double inside-outside situation and how liabilities of foreignness and outsidership are linked to both external and internal networks. Greenfield subsidiaries suffer from foreignness and outsidership in the external/local network and overcome this situation by leveraging on their insidership within the MNE. In contrast, acquired subsidiaries are often considered as outsiders in the MNE, but can benefit from their insidership in local business networks.

Table 3 Hypothesis test for the direct and indirect effects of establishment mode on local business embeddedness.a Direct effect Effect (ψ)

b

−0.637**

Indirect effect SE

Effect (θ)c

95% LCId

95% LCId

0.250

0.251#

0.0306

0.5599

a The direct and indirect effects are measured using the coefficient results in Table 2 as explained by Hayes (2013). b *,** and *** denote significance at the 10%, 5%, and 1% levels, respectively. c # indicates statistical significance at the 95% confident interval. d LCI indicates lower confidence interval, and UCI indicates upper confidence interval.

subsidiary size. We find statistical support for the impact of subsidiary autonomy on both local social commitment and local business embeddedness respectively at the 1% and 10% confidence levels, confirming the results of previous studies (Ambos et al., 2011; Andersson et al., 2005). The size of the subsidiary has a significant and positive effect on the local social commitment at the 5% confidence level. Surprisingly, we do not find statistical support for the other control variables. As a robustness check, we tested our hypotheses through structural equation modeling (SEM). SEM allows for the inclusion of latent variables and assesses measurement errors estimating simultaneously all the relations proposed in the theoretical model. The results remain robust and in line with the results presented above. The fit indices suggest a good fit of the model to the data as well.

5.2. Managerial implications

5. Discussion and conclusion

The results of our study have several managerial implications. They suggest that for the acquired subsidiary, more directly focused on business networks, one key managerial issue is making its insider position and competitiveness in the local business context well perceived and estimated by the headquarters and other leading subsidiaries, e.g. regional headquarters. When the advantages of being an insider in the business network are relevant at the corporate level, the acquired subsidiary can strengthen its importance and power within the internal network. Then, the acquired subsidiary can also improve its relationships with local stakeholders and primarily with the government, in order to widen its role in the host territory’s economic development. This can also strengthen its role within the internal network. A clear example is cooperating with local authorities in order to attract

5.1. Theoretical implications The aim of this study was to explain the effects of the establishment mode of foreign subsidiaries (greenfield vs acquisition) on the nature of relationships developed in local markets. More specifically, using a network approach and underlining the liabilities of “foreignness” and “outsidership” faced by foreign subsidiaries, we theoretically and empirically investigated how acquired and greenfield subsidiaries differ concerning the type of networks they choose to develop in their host country. Our results show that acquired subsidiaries will be more directly involved in economic (business) relationships with mutual 7

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corporate investments in the territory. It is well known that a key issue in MNE management is the balancing between the integration of subsidiaries operating in different countries and their autonomy in managing business and economic activities where they are located. Our findings indicate that a greenfield subsidiary needs strong competences for planning and implementing an effective stakeholders’ engagement process in the country where it is located. Hence, it is important to provide the greenfield subsidiary with a strong attitude toward sustainability ever since its inception. The headquarters have to support the greenfield subsidiary’s initiatives aimed at social outcomes, also providing it with consistent guidelines. In the medium term, the greenfield subsidiary has to be able to properly exploit its social relationships and positive positioning in social networks for strengthening its competitiveness in the foreign country, and thus its role in the multinational’s corporate strategy. Through the development of social relationships with local stakeholders, the greenfield subsidiary can grasp new business opportunities based on specific conditions of the local market that might become relevant for the multinational enterprise. The comprehension and exploitation of the “bottom of the pyramid” segment of the market is one significant example.

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5.3. Limitations and directions for future research The conducted study presents several limitations and provides promising research perspectives. It would be interesting to further analyze why the establishment mode influences the type of networks developed by local subsidiaries. Our empirical investigation focused on subsidiaries located in Italy and it seems necessary to increase the sample size in order to test the possible impact of the country of origin of the MNE on the type of networks invested. We could thus differentiate multinational enterprises from mature economies and those from emerging economies. Recent IB literature has emphasized the different behaviors of these two groups of multinationals (Anderson et al., 2015; Fan, Cui, Li, & Zhu, 2016). It would be relevant to extend the study to other countries, since the characteristics of the hostcountry environment, e.g. the institutional context, are likely to influence the type of networks developed locally. It could also be interesting to extend the study to joint ventures, since subsidiaries that are jointly owned by foreign and local companies may have a different commitment in social and business networks than wholly-owned subsidiaries. In our study, we tested the impact of the establishment mode on the type of networks favored by foreign subsidiaries. It seems possible to examine the inverse relationship, i.e. how the type of networks sought by a multinational enterprise might influence the choice of market entry modes. In fact, MNEs often decide to enter foreign markets through acquisitions to access new networks (suppliers, distributors, customers etc.) in the targeted host countries (Lee & Lieberman, 2010); hence, the type of networks sought may influence the selected market entry mode. Future studies might extend the model of this study investigating the impact of different types of network on the performance of foreign subsidiaries. Finally, it would be interesting to extend the time period of our study, since the developed relationships and their impact on insidership in both local networks and within the MNE are likely to evolve over time. References Almeida, P., & Phene, A. (2004). Subsidiaries and knowledge creation: The influence of the MNC and host country on innovation. Strategic Management Journal, 25(8–9), 847–864. Ambos, T. C., Andersson, U., & Birkinshaw, J. (2010). What are the consequences of initiative-taking in multinational subsidiaries? Journal of International Business Studies, 41(7), 1099–1118. Anderson, J., Suthreland, D., & Severe, S. (2015). An event study of home and host country patent generation in Chinese MNEs undertaking strategic asset acquisition in developed markets. International Business Review, 24(1), 758–771. Andersson, U., Forsgren, M., & Holm, U. (2002). The strategic impact of external networks: Subsidiary performance and competence development in the multinational

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